PORT TOWNSEND — Port Townsend Paper Corp. has abandoned a much-disputed $54 million project that would have upgraded the mill's biomass cogeneration plant.

Company President Roger Hagan told the Peninsula Daily News on Wednesday that the company's construction permit will not be extended beyond the 18-month June deadline for the improvements.

“It's not a financially viable project,” said Hagan, who took over at the mill last May, succeeding Roger Loney.

“It is not our intention to proceed with the project or ask for another extension.”

He attributed the decision to environmental challenges that delayed the project, an overwhelmingly strong market for cheap natural gas compared with biomass and the expiration of federal tax-credit incentive programs despite a $2 million state grant for the project that the company received in 2009.

The project would have allowed the factory to burn forest biomass to create 24 megawatts for sale as green energy.

Nippon Paper Industries USA in Port Angeles has built an $85 million expansion of its biomass cogeneration plant that was dedicated in November but has yet to go online while a new boiler is repaired.

Nippon benefited from federal tax incentives that did not make or break the Port Angeles project but gave it a “significant” financial boost, Nippon plant manager Steve Johnson said Thursday.

Johnson, promoted in March to take over for Harold Norlund — who resigned to take a paper mill job in Canada — said the two mills would not have competed for electricity sales because of the relatively small amount of electricity produced by the plants.

Both projects have survived numerous challenges by environmental groups that have claimed that burning wood to create energy is too costly to the environment.

Officials have said they had satisfied environmental concerns and that projects were properly permitted.

In Port Townsend Paper's most recent victory, the state Supreme Court in February upheld the company's permit for the project, turning back an appeal by five environmental groups, including PT AirWatchers of Port Townsend.

PT AirWatchers Director Gretchen Brewer, who said Feb. 27 that she was “sorely disappointed” by the court's ruling, was anything but dispirited when informed Thursday that the company was dropping the project.

“That is very exciting,” Brewer said.

“It does vindicate what we have been saying all along: that this is a dirty, polluting project.

“If they follow through and don't seek a permit extension, and cancel the project, I think it shows by citing the environmental cost . . . how important it is that the whole community expression of concerns about the environment and the well-being of the environment has finally reached their ears, and for that, we are extremely happy.”

Said Hagan: “Would the project have gone on without the environmental challenges? It's hard to say.

“I couldn't say definitely that it sunk the project, but it certainly was a factor.”

The upgrade would have created 108 temporary jobs and 30 new jobs at the mill, which employs 290 full-time workers and is the largest private employer in Port Townsend, with $100 million to $300 million in annual revenue.

Hagan said the company is proceeding with $10 million to $12 million for federally required environmental upgrades that spurred the company's interest in also upgrading its existing biomass plant to help cover the cost of the improvements.

In the project, the existing biomass-powered boiler would have powered a new turbine that would have produced steam for the plant and 24 megawatts at the mill, which consumes a third of all the recycled cardboard collected in the state and converts it into paperboard products.

The expansion project, slated for completion in April 2012, was delayed by court appeals and had been scheduled to be online by this year or 2015.

In addition, after the tax-credit incentive programs dried up, the company was left competing with natural gas on the open market, Hagan said.

Hagan said power produced by Port Townsend Paper's cogeneration plant would have cost electricity customers “on the order of twice” what they would pay for natural gas.

“Natural gas sets basically the cost of energy in the U.S.,” Hagan said.

Natural gas is an alternate fuel that is cheaper than biomass because it is not a renewable energy, company spokesman Kevin Scott said Thursday.

By comparison, Nippon already has customers for the 20 megawatts its cogeneration plant will produce once repairs are completed, Johnson said in an earlier interview.

Hagan said that unlike Nippon, where company officials have said electricity sales are vital to the mill's survival, the market remains “fairly strong” for Port Townsend Paper Corp. products — with or without an upgraded cogeneration plant.

“It was a good project that would have provided us a return on an investment, much of which we have to make anyway,” Hagan said.